A seemingly absurd amount of 1.5%-2% properties in the area?

23 Replies

Hi BP, this is my first thread so be kind :).

My wife and I are just starting out in real estate investing, and have a decent amount of capital to throw right into it especially compared to real estate prices in the area.

It seems like one of the biggest challenges starting off is finding a good investment and making the right purchase. That being said, analyzing properties in my area including using BP's rental calculator and my county assessor's office, it seems like there are a ton of 1.5%+ properties based on list price on the MLS in my area that have sat for a long time anywhere from 120 days to 1.5+ years. I'm seeing list price of 115k with current active rent prices of $1,950, or list price of 80k with rent of $1,300 all based on the current state of repairs for these properties. I'm sure I could talk down the list price as well with their time on market.

When viewing these properties, what should we be looking at that would kill these deals? Seems like I must be missing something here... If these were really good deals, they wouldn't be sitting so long would they? It isn't like there's been a sudden price drop on them either that all of a sudden gives them decent numbers.

Could it be that the area is just flooded with good real estate investments and the REI's in the area don't have capital to snatch them all up, so the amazing ones go but the good ones sit?

Could be that the serious investors are getting them for much better than 1.5-2% and the 80-115k inventory is sitting on the market waiting for a "retail" buyer.  I typically look for a good home in the 20-60k range myself but may pay more if a property is in a good location, in fairly good shape, and large.

Originally posted by @Jassem A.:

Could be that the serious investors are getting them for much better than 1.5-2% and the 80-115k inventory is sitting on the market waiting for a "retail" buyer. I typically look for a good home in the 20-60k range myself but may pay more if a property is in a good location, in fairly good shape, and large.

Would you suggest holding out then for the excellent properties that are pulling in even better numbers? Seems like I should just jump in and start snatching up these 1.5-2% properties as they should cash flow well for me and get me the ROI and cash on cash that I'm looking for. No reason not to grab them if they fit my goals right?

Or would you suggest revising my goals and going for better deals?

I'm just a little nervous putting in offers on properties sitting for 6+ months that other investors have passed by for so long. I'll certainly be putting in 70-80% offers not full price as these properties are stagnant.

Getting a 115k property for say 92k that cash flows 1,950 would be a great purchase IMO, even if I need to drop 10-15k in repairs immediately.

Updated almost 2 years ago

The 115k unit is a 4plex not a SFR renting for $1,950. It is 4 units rented for roughly $500 a piece which is definitely market.

@Marcus Narvaez

I would question whether it would be that easy to find a good tenant that will pay 1950/mo.  A typical 3/2 in my area will rent for anywhere from 900-1200.  Larger properties I'm happy to get 1500/mo for.  I would definitely put in lower offers if these properties have been sitting for a while.  I'd also find out what similar properties are selling for at the courthouse steps or by looking at nearby rental properties and finding out what they last sold for.

Those rent/value ratios are crazy good.  I can't get a decent 1%er here, even off-market from a motivated seller.

My big concern other than condition would be the area/neighborhood.  Go there at night.  Watch and listen.

My only other comment would maybe stay in the blue collar rent-range.  This one renter may be paying $1950 for a $100k house but you may not be able to count on that long-term.  Stay with bread and butter $900-ish rents or whatever the prevailing rate is.  

Is your town decent over-all @Marcus Narvaez ?  Is your craigslist full of buy for cash now ads like Toledo or Detroit?  Maybe you're in an area nobody really knows about.   Get to work if that's so!

The particular example at 115k is a 4-plex, so monthly rent is 450-500 a unit which is market for the area.

Also, the city in general is very low crime, so even the low income or distressed parts of town are not particularly violent/dangerous. I'm sure there's problems, but it is more so "if the city is going to have any crime, it'll be here" rather than "this is where all the crime is happening".

Be sure to check the comps on rents, expenses, and purchase prices in the area. You should look for solid proof from other investors, actual tenants, property management firms in the area, and realtors to confirm that you could really get those rents, what your likely monthly expenses would be, etc. You might also be in for a surprise when you go through the inspection, the properties might have more issues than you're currently imagining (rot, foundation issues). 

@Marcus Narvaez

Multifamily will likely be more expensive to manage and maintain. If it's a good neighborhood and you are able to find good tenants then it could be worth it. I'd also find out how much taxes and insurance would be ahead of time. I'd also find out if you would be on the hook to pay any of the utilities. All of this can add up and result in a net loss.

Originally posted by @Evan Thomas :

You might also be in for a surprise when you go through the inspection, the properties might have more issues than you're currently imagining (rot, foundation issues). 

 That's where I think some of the biggest risk is. Some of these properties are 100ish years old, so some of the problems I run into may be much more significant than "carpet needs replaced". I'll be sure to be extra scrupulous here when evaluating the properties.

Originally posted by @Marcus Narvaez :

The particular example at 115k is a 4-plex, so monthly rent is 450-500 a unit which is market for the area.

Also, the city in general is very low crime, so even the low income or distressed parts of town are not particularly violent/dangerous. I'm sure there's problems, but it is more so "if the city is going to have any crime, it'll be here" rather than "this is where all the crime is happening".

 Makes more sense now.  The $450-$550 rents can be a tough (but profitable if you handle it yourself) sandbox to play in.  Management & turnover intensive.  More potential for drama and slow-pays.  

I have 17 small $500-ish apts in a rural town that I've self-managed for about 13 years.  Took a while to get the systems and screening process in place to avoid the worst of 'em.  I still consider myself to be a compassionate LL, but definitely more calloused than I was in the beginning!

Many homes 100+ years old are built very well which is why they are still around.  I would go as far to say that some will probably outlast many newly built homes that were thrown up with pine and flakeboard.

These kind of properties make up some of my portfolio.  As long as I can justify with good rental demand and rental history there, and the repair costs to the building are not outrageous, it's a good play.  

Remember, that 1,950 is not your cash flow. Subtract your PITI roughly minus 700 if you put 20% down. Then the other expenses to run the place. That being said, the return is still pretty sweet. You could make up your cash investment in 2 years. Is it a multi?

@Raj Tirur

Yes it is a multi. I'm well aware that 1,950 wouldn't be the cash flow. Purchasing at listed price (won't do), would be about $500/mo if paying a property management company at 12%, or at about $700/mo if self managing.

I see some people wanting about $200/unit in cash flow, but I'm ok with the $125-$175 this property would bring in.

I'll definitely have to look into how quickly rentals fill in that part of town.

@Marcus Narvaez

I am south of you in Waupaca county.  I own a 2% 4 plex... and a couple 2% sfrs.

The group here has explained my experience pretty well. These properties generally attract less desirable tenants.

 There is more turnover and damage during turnover. 1/5th of my properties fit this group, yet 3/4 of my evictions and court time is from this group.

These older converted buildings are much more difficult to work on.  It also costs a lot more to update than a conventional building. You will go broke if you try to make everything perfect on these properties.

 Take a close look at your expense on these as properties. Utilities and Wisconsin property taxes will eat you alive with one eviction and 3 late payers..They are what they are. 

With that being said.. If you self manage these properties you will get a fast education. I know I did.

I stay away from these now days and focus on B properties. 1.25ish with poor management and value add capable.

There are people on here absolutely killing it with these properties. There was just a podcast on these types. Just has not been my experience.

Peter

Lately, I've been purchasing 4%+ properties in Southern WI. That being said, you would be paying twice as much at a 2% price in the same location which would be incredibly higher than the market value of the property. It really depends on the market and if you are paying full retail for the property or not. The 2% rule is simply a rough guideline, you'll need to compare multiple comps in your area to figure out if you are getting a good price or not.  

The good news is you can over pay in area's like this and it will still cash flow just fine, you just won't be able to sell any time in the near future without losing some initial capital.

@Marcus Narvaez 1.5 or 2% is easy in Wisconsin....I invest in Milwaukee and I see 3%+ all day long.  Doesn't mean the properties your seeing aren't good deals however there is a lot more higher % deals out there.  Good luck on your journey man!

Originally posted by @Marcus Narvaez :
Originally posted by @Jassem A.:

Could be that the serious investors are getting them for much better than 1.5-2% and the 80-115k inventory is sitting on the market waiting for a "retail" buyer. I typically look for a good home in the 20-60k range myself but may pay more if a property is in a good location, in fairly good shape, and large.

Would you suggest holding out then for the excellent properties that are pulling in even better numbers? Seems like I should just jump in and start snatching up these 1.5-2% properties as they should cash flow well for me and get me the ROI and cash on cash that I'm looking for. No reason not to grab them if they fit my goals right?

Or would you suggest revising my goals and going for better deals?

I'm just a little nervous putting in offers on properties sitting for 6+ months that other investors have passed by for so long. I'll certainly be putting in 70-80% offers not full price as these properties are stagnant.

Getting a 115k property for say 92k that cash flows 1,950 would be a great purchase IMO, even if I need to drop 10-15k in repairs immediately.

There's your answer. Those units are renting for $500/ea. Due to CapEx, you WILL NOT cash flow long term with rents that low. Ben Leybovich would argue that you probably can't cash flow if your rents are less than $700. At least one article on here discusses this very fact. I think if you're building is >80-100 units, well managed, you can probably make money with rents $500/unit.

Originally posted by @Chris Heeren :

Lately, I've been purchasing 4%+ properties in Southern WI. That being said, you would be paying twice as much at a 2% price in the same location which would be incredibly higher than the market value of the property. It really depends on the market and if you are paying full retail for the property or not. The 2% rule is simply a rough guideline, you'll need to compare multiple comps in your area to figure out if you are getting a good price or not.  

The good news is you can over pay in area's like this and it will still cash flow just fine, you just won't be able to sell any time in the near future without losing some initial capital.

Chris, are you saying that by "paying twice as much" - the rents there QUADRUPLE?

(Or did you mean to say: "paying half as much"? Otherwise, how are you getting 4%/m?)...

@Marcus Narvaez , I recommend calculating a (good) Property Manager into your expenses.

Next, I recommend you go out and FIND said good Property Manager - immediately.

Ask them: what areas are fine, what ones aren't - and why? You'll have your answers! 

Next, find (good) Contractor/s, and a (good) Realtor who gets you. All the best...

Originally posted by @Brent Coombs :

Chris, are you saying that by "paying twice as much" - the rents there QUADRUPLE?

(Or did you mean to say: "paying half as much"? Otherwise, how are you getting 4%/m?)...

 It's however you want to look at it.   I just picked up a Tri-Plex for $35K that rents out for $1,500/mo - if you come along and decide that 2% is a deal, you would end up paying $75,000 for that same building. Would that be a good deal? No - The appraised value is around $50K-$55K and you greatly overpaid because you were solely looking at the "2% Rule" and not other market comps.

They play by a different set of rules in WI.

I invest in Monroe, WI and it's tougher to find rent ratios of 2%. I have a duplex I paid 75k for that rents for 1125 but it cash flows good, most 4 units here are 150k-190k and rents total around 2200-2500.

if i was finding deals like all of you I would have retired years ago. 

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